When it comes to owning a small business, maintaining accurate and detailed recordkeeping is critical for understanding your business and meeting your tax obligations. There are a few recordkeeping requirements every small business should follow.

For most small businesses, basic recordkeeping involves recording income and expenses in a checkbook. The checkbook is used as a starting point for totaling the business’s income and expenses.

However, the business must also keep documents to support the entries in the checkbook register. Supporting documents include cancelled checks, deposit slips and bank statements.

In addition, supporting documents specifically related to income and expenses are also important to keep. Income-related supporting documents include customer invoices, bank deposit slips, receipt books, cash register tapes, and credit card sales slips. Forms 1099-MISC and 1099-INT received by the business should be kept with the business’s tax records. Expense-related supporting documents include vendor invoices, cancelled checks, cash register receipts, account statements, credit card charge slips, and real estate closing statements. Copies of any 1099 forms issued by the business should also be retained with the tax records. Depreciation schedules and year-end inventory calculations are also important to keep.

Many business owners keep their credit card statements but neglect to keep the original purchase receipts. This becomes a problem if the business is audited because most credit card statements only show where the purchase occurred, not what was purchased. For example, a $500 charge at an office supply store might be for a PDA purchased for business use or an MP3 player for a birthday present.

Specific recordkeeping rules apply to expenses related to travel, transportation, entertainment, and gifts. IRS Pub. 463, “Travel, Entertainment, Gifts and Car Expenses”, provides useful information about these expenses. Typically, taxpayers should keep proof of the amount, date, place and business purpose of these types of expenses.

As a small business owner, you must keep your records for an indefinite period of time. The IRS may consider them as “material” as long as your business is in existence. Records related to property must be kept as long as you own the property. Records of income, deductions and credits should be kept until the statute of limitation expires. Generally, the IRS has three years after you file a return to audit the return and assess additional taxes.

Tax laws can be complicated, especially when it comes to small businesses. Understanding the laws, rules, and regulations can save you time and money if you are audited. For more information, talk to the professionals at Phillips Tax Service.

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